Managers must ride the blockchain wave for business transformation
Multinational banks in HK are already using distributed ledger technology solutions to increase transparency, reduce fraud
Blockchain isn’t a concept managers can afford to ignore. It is time to wrap your brain around what it is so you understand the impact on your business.
Blockchain is a type of distributed ledger technology that enables data to be confidently shared between a network of participants. The confidence stems from the ability to mathematically prove that the data hasn’t been tampered with, that access is controlled, and the assurance that everyone is accessing the same view of the data.
If you’re thinking: “Why the silly name?” And “I’m still not sure I get what it is.” You are not alone. But keep reading.
The name derives from the fact that it stores data in “blocks” that are linked together cryptographically and chronologically into a “chain” made of complex mathematical algorithms. (So now the name should make more sense).
Data is presented to a network of validators who work to achieve a consensus via a number of different possible mechanisms. Once the data is validated and consensus is achieved, the next block is created and updated across the network of nodes. Once created, the ledger cannot be altered, and it is updated for everyone in the network at the same time.
That’s what makes it consistent, durable and secure with controlled access such that each packet of data is only accessible by those with the appropriate access keys.
Blockchain’s consistency, security and efficiency is driving businesses to explore its’ usefulness for payments, clearing and settlement (especially in multi-party transactions) because the efficiencies are enormous at a time when regulation has put intense pressure on banks’ profit margins. The transparency may also help regulators monitor compliance and reduce the likelihood of fraud.
Hong Kong’s multinational banks may be at the forefront of this shift. If banks can agree to sharing data using a bespoke form of blockchain it could reduce manual processing and reconciliation, increase the speed of processing transactions while simultaneously helping them comply with finance and risk regulations around anti-money laundering (AML) and “know your customer” (KYC). That is a cost-saving move that is going to appeal to the industry.
According to Accenture research, banks incurred approximately US$8 billion in AML regulatory fines in 2014. Banks obviously want to stem this loss, and adopting a system that provides transparency and increases KYC compliance goes a long way toward reducing fraud. A tamper-proof record could ease the process of getting to know a client and demonstrating compliance with AML regulations. Given these benefits it is reasonable to think that sooner, rather than later, major businesses will adopt blockchain for this and a wider range of functions.
You’ll notice these are all couched in terms of potential – “it could be used”. At present, blockchain is in its infancy. Given there has been a fair share of hype about it that may lead some to be sceptical. We are at the heart of this: we’ve partnered with emerging fintech leaders such as Digital Asset Holdings to implement distributed-ledger solutions to improve efficiency, security, auditability, and simplicity for enterprise clients, and Ripple to reimagine payments capabilities. Accenture is also a leading participant in Linux Foundation’s Hyperledger Project, a collaborative effort among technologists to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally.
We see early-stage capabilities coming to market over the next two years and first-mover market level adoption within three to five years. Five to ten years from now your children may be wondering why you struggled to understand what blockchain offers. By 2027 we believe the technology will be central to the global capital markets infrastructure.
If banks and other financial institutions are able to remove reconciliation and other inefficiencies, speed up transactions, and in general take costs out of the system those savings will ultimately benefit customers and shareholders alike. As managers, you should be ascending the learning curve to understand the potential for your business.
David Treat is managing director and the global head of Accenture’s Blockchain practise for the financial services industry